Friday, May 1, 2009

Commodity Explosion

WheatCrude OilSoybeans
Apparently, investors are betting on inflation. This is significant today because stocks are not advancing, but investors are still betting heavily on renewed inflation. Crude oil has reached $53.65/barrel, and soybeans has reached $10.81/bushel. Both have broken out above previous highs, reaching new record highs for the year. This despite that crude oil inventories in the United States continue to build.

Arlan Suderman says that the "first of the month brought fresh fund buying". He also said yesterday that there were liquidations to lock in profits on the last day of the month. Prices rebounded strongly, however, with fresh buying yesterday also. This is notable for me to take advantage of the volatility on the last day of each month and the first day of the following month as well. Suderman also said, "Soybeans at 7-month highs on supply concerns; Money is flowing again."

Hugo Chavez: Obama Imposing Socialism "Without A Doubt"

from CNS News:
Inspired by his meeting with U.S. President Barack Obama at the Americas Summit, Venezuelan President Hugo Chavez declared on Sunday that Venezuelan socialism has begun to reach the United States under the Obama administration.

“I am coming back from Trinidad and Tobago, from the Americas Summit where, without a doubt, the position that Venezuela and its government has always defended, especially starting 10 years ago, of resistance, dignity, sovereignty and independence has obtained in Port of Spain, one of the biggest victories of our history,” Chavez said.

“It would seem that the changes that started in Venezuela in the last decade of the 20th century have begun to reach North America,” he added.

Chavez made the comments Sunday to a crowd gathered for the 199th Commemoration of the Independence Declaration of Venezuela.

Thursday, April 30, 2009

Bond Vigilantes Beating Fed At Its Own Game

Apparently, market forces are beating the Fed in its attempts to artificially force interest rates lower. This daily chart shows the long, green spike in treasuries (30 yr) that occurred six weeks ago when the Fed announced it would buy long-term treasuries. That was the lower interest rates ever were. They have been rising steadily since, especially accelerating downward (higher interest rates) in recent days, despite that the stock market has been largely flat for a month!

Soybean Breakout!

Volume Like the Good Ol' Days

The volume of buying in the grains today is just like it used to be until last fall, when the bottom fell out of commodities. I like to see this typee of buying!

Stock Market Head Fake

Was yesterday's rally and breakout a head fake? So far today, it looks like it! Stock indexes have now crossed into negative territory for the day, after the Dow had been up 120+ points!

Nat Gas Hits New Low

Nat gas is still searching for a bottom.

Wednesday, April 29, 2009

Dollar Decimated

Commodities are higher on weak volume -- and weak Dollar (above).

GDP Drops More Than Expected, But Stocks Move Higher

Ignore the bad news and buy! Sounds like another round of "irrational exuberance". GDP was -6.1% -- worse than expected. But who am I to complain? I think market participants are deluding themselves to believe that the worst is over. We are now just a few ticks shy of the recent highs, and a potential breakout higher.

Tuesday, April 28, 2009

Carbon Emissions, Cap and Trade Policy: Back to Reality

from John Mauldin's Outside the Box, Peter Huber says the following in an article called "Bound to Burn":

Like medieval priests, today's carbon brokers will sell you an indulgence that forgives your carbon sins. It will run you about $500 for 5 tons of forgiveness -- about how much the typical American needs every year. Or about $2,000 a year for a typical four-person household. Your broker will spend the money on such things as reducing methane emissions from hog farms in Brazil.

But if you really want to make a difference, you must send a check large enough to forgive the carbon emitted by four poor Brazilian households, too -- because they're not going to do it themselves. To cover all five households, then, send $4,000.

If making carbon this personal seems rude, then think globally instead. During the presidential race, Barack Obama was heard to remark that he would bankrupt the coal industry. No one can doubt Washington's power to bankrupt almost anything -- in the United States. But China is adding 100 gigawatts of coal-fired electrical capacity a year. That's another whole United States' worth of coal consumption added every three years, with no stopping point in sight. Much of the rest of the developing world is on a similar path.

Cut to the chase. We rich people can't stop the world's 5 billion poor people from burning the couple of trillion tons of cheap carbon that they have within easy reach. We can't even make any durable dent in global emissions -- because emissions from the developing world are growing too fast, because the other 80 percent of humanity desperately needs cheap energy, and because we and they are now part of the same global economy. What we can do, if we're foolish enough, is let carbon worries send our jobs and industries to their shores, making them grow even faster, and their carbon emissions faster still.

We don't control the global supply of carbon.

Ten countries ruled by nasty people control 80 percent of the planet's oil reserves -- about 1 trillion barrels, currently worth about $40 trillion. If $40 trillion worth of gold were located where most of the oil is, one could only scoff at any suggestion that we might somehow persuade the nasty people to leave the wealth buried. They can lift most of their oil at a cost well under $10 a barrel. They will drill. They will pump. And they will find buyers. Oil is all they've got.

Poor countries all around the planet are sitting on a second, even bigger source of carbon -- almost a trillion tons of cheap, easily accessible coal. They also control most of the planet's third great carbon reservoir -- the rain forests and soil. They will keep squeezing the carbon out of cheap coal, and cheap forest, and cheap soil, because that's all they've got. Unless they can find something even cheaper. But they won't -- not any time in the foreseeable future.

We no longer control the demand for carbon, either. The 5 billion poor -- the other 80 percent -- are already the main problem, not us. Collectively, they emit 20 percent more greenhouse gas than we do. We burn a lot more carbon individually, but they have a lot more children. Their fecundity has eclipsed our gluttony, and the gap is now widening fast. China, not the United States, is now the planet's largest emitter. Brazil, India, Indonesia, South Africa, and others are in hot pursuit. And these countries have all made it clear that they aren't interested in spending what money they have on low-carb diets. It is idle to argue, as some have done, that global warming can be solved -- decades hence -- at a cost of 1 to 2 percent of the global economy. Eighty percent of the global population hasn't signed on to pay more than 0 percent.

Accepting this last, self-evident fact, the Kyoto Protocol divides the world into two groups. The roughly 1.2 billion citizens of industrialized countries are expected to reduce their emissions. The other 5 billion -- including both China and India, each of which is about as populous as the entire Organisation for Economic Co-operation and Development -- aren't. These numbers alone guarantee that humanity isn't going to reduce global emissions at any point in the foreseeable future -- unless it does it the old-fashioned way, by getting poorer. But the current recession won't last forever, and the long-term trend is clear. Their populations and per-capita emissions are rising far faster than ours could fall under any remotely plausible carbon-reduction scheme.

Might we simply buy their cooperation? Various plans have circulated for having the rich pay the poor to stop burning down rain forests and to lower greenhouse-gas emissions from primitive agricultural practices. But taking control of what belongs to someone else ultimately means buying it. Over the long term, we would in effect have to buy up a large fraction of all the world's forests, soil, coal, and oil -- and then post guards to make sure that poor people didn't sneak in and grab all the carbon anyway. Buying off people just doesn't fly when they outnumber you four to one.

Might we instead manage to give the world something cheaper than carbon? The moon-shot law of economics says yes, of course we can. If we just put our minds to it, it will happen. Atom bomb, moon landing, ultracheap energy -- all it takes is a triumph of political will.

Really? For the very poorest, this would mean beating the price of the free rain forest that they burn down to clear land to plant a subsistence crop. For the slightly less poor, it would mean beating the price of coal used to generate electricity at under 3 cents per kilowatt-hour.

And with one important exception, which we will return to shortly, no carbon-free fuel or technology comes remotely close to being able to do that. Fossil fuels are extremely cheap because geological forces happen to have created large deposits of these dense forms of energy in accessible places. Find a mountain of coal, and you can just shovel gargantuan amounts of energy into the boxcars.

Shoveling wind and sun is much, much harder. Windmills are now 50-story skyscrapers. Yet one windmill generates a piddling 2 to 3 megawatts. A jumbo jet needs 100 megawatts to get off the ground; Google is building 100-megawatt server farms. Meeting New York City's total energy demand would require 13,000 of those skyscrapers spinning at top speed, which would require scattering about 50,000 of them across the state, to make sure that you always hit enough windy spots. To answer the howls of green protest that inevitably greet realistic engineering estimates like these, note that real-world systems must be able to meet peak, not average, demand; that reserve margins are essential; and that converting electric power into liquid or gaseous fuels to power the existing transportation and heating systems would entail substantial losses. What was Mayor Bloomberg thinking when he suggested that he might just tuck windmills into Manhattan? Such thoughts betray a deep ignorance about how difficult it is to get a lot of energy out of sources as thin and dilute as wind and sun.

It's often suggested that technology improvements and mass production will sharply lower the cost of wind and solar. But engineers have pursued these technologies for decades, and while costs of some components have fallen, there is no serious prospect of costs plummeting and performance soaring as they have in our laptops and cell phones. When you replace conventional with renewable energy, everything gets bigger, not smaller -- and bigger costs more, not less. Even if solar cells themselves were free, solar power would remain very expensive because of the huge structures and support systems required to extract large amounts of electricity from a source so weak that it takes hours to deliver a tan.

This is why the (few) greens ready to accept engineering and economic reality have suddenly emerged as avid proponents of nuclear power. In the aftermath of the Three Mile Island accident -- which didn't harm anyone, and wouldn't even have damaged the reactor core if the operators had simply kept their hands off the switches and let the automatic safety systems do their job -- ostensibly green antinuclear activists unwittingly boosted U.S. coal consumption by about 400 million tons per year. The United States would be in compliance with the Kyoto Protocol today if we could simply undo their handiwork and conjure back into existence the nuclear plants that were in the pipeline in nuclear power's heyday. Nuclear power is fantastically compact, and -- as America's nuclear navy, several commercial U.S. operators, France, Japan, and a handful of other countries have convincingly established -- it's both safe and cheap wherever engineers are allowed to get on with it.

But getting on with it briskly is essential, because costs hinge on the huge, up-front capital investment in the power plant. Years of delay between the capital investment and when it starts earning a return are ruinous. Most of the developed world has made nuclear power unaffordable by surrounding it with a regulatory process so sluggish and unpredictable that no one will pour a couple of billion dollars into a new plant, for the good reason that no one knows when (or even if) the investment will be allowed to start making money.

And countries that don't trust nuclear power on their own soil must hesitate to share the technology with countries where you never know who will be in charge next year, or what he might decide to do with his nuclear toys. So much for the possibility that cheap nuclear power might replace carbon-spewing sources of energy in the developing world. Moreover, even India and China, which have mastered nuclear technologies, are deploying far more new coal capacity.

Remember, finally, that most of the cost of carbon-based energy resides not in the fuels but in the gigantic infrastructure of furnaces, turbines, and engines. Those costs are sunk, which means that carbon-free alternatives -- with their own huge, attendant, front-end capital costs -- must be cheap enough to beat carbon fuels that already have their infrastructure in place. That won't happen in our lifetimes.

Another argument commonly advanced is that getting over carbon will, nevertheless, be comparatively cheap, because it will get us over oil, too -- which will impoverish our enemies and save us a bundle at the Pentagon and the Department of Homeland Security. But uranium aside, the most economical substitute for oil is, in fact, electricity generated with coal. Cheap coal-fired electricity has been, is, and will continue to be a substitute for oil, or a substitute for natural gas, which can in turn substitute for oil. By sharply boosting the cost of coal electricity, the war on carbon will make us more dependent on oil, not less.

The first place where coal displaces oil is in the electric power plant itself. When oil prices spiked in the early 1980s, U.S. utilities quickly switched to other fuels, with coal leading the pack; the coal-fired plants now being built in China, India, and other developing countries are displacing diesel generators. More power plants burning coal to produce cheap electricity can also mean less natural gas used to generate electricity. And less used for industrial, commercial, and residential heating, welding, and chemical processing, as these users switch to electrically powered alternatives. The gas that's freed up this way can then substitute for diesel fuel in heavy trucks, delivery vehicles, and buses. And coal-fired electricity will eventually begin displacing gasoline, too, as soon as plug-in hybrid cars start recharging their batteries directly from the grid.

To top it all, using electricity generated in large part by coal to power our passenger cars would lower carbon emissions -- even in Indiana, which generates 75 percent of its electricity with coal. Big power plants are so much more efficient than the gasoline engines in our cars that a plug-in hybrid car running on electricity supplied by Indiana's current grid still ends up more carbon-frugal than comparable cars burning gasoline in a conventional engine under the hood. Old-guard energy types have been saying this for decades. In a major report released last March, the World Wildlife Fund finally concluded that they were right all along.

But true carbon zealots won't settle for modest reductions in carbon emissions when fat targets beckon. They see coal-fired electricity as the dragon to slay first. Huge, stationary sources can't run or hide, and the cost of doing without them doesn't get rung up in plain view at the gas pump. California, Pennsylvania, and other greener-than-thou states have made flatlining electricity consumption the linchpin of their war on carbon. That is the one certain way to halt the displacement of foreign oil by cheap, domestic electricity.

The oil-coal economics come down to this. Per unit of energy delivered, coal costs about one-fifth as much as oil -- but contains one-third more carbon. High carbon taxes (or tradable permits, or any other economic equivalent) sharply narrow the price gap between oil and the one fuel that can displace it worldwide, here and now. The oil nasties will celebrate the green war on carbon as enthusiastically as the coal industry celebrated the green war on uranium 30 years ago.

The other 5 billion are too poor to deny these economic realities. For them, the price to beat is 3-cent coal-fired electricity. China and India won't trade 3-cent coal for 15-cent wind or 30-cent solar. As for us, if we embrace those economically frivolous alternatives on our own, we will certainly end up doing more harm than good.

By pouring money into anything-but-carbon fuels, we will lower demand for carbon, making it even cheaper for the rest of the world to buy and burn. The rest will use cheaper energy to accelerate their own economic growth. Jobs will go where energy is cheap, just as they go where labor is cheap. Manufacturing and heavy industry require a great deal of energy, and in a global economy, no competitor can survive while paying substantially more for an essential input. The carbon police acknowledge the problem and talk vaguely of using tariffs and such to address it. But carbon is far too deeply embedded in the global economy, and materials, goods, and services move and intermingle far too freely, for the customs agents to track.

Consider your next Google search. As noted in a recent article in Harper's, "Google . . . and its rivals now head abroad for cheaper, often dirtier power." Google itself (the "don't be evil" company) is looking to set up one of its electrically voracious server farms at a site in Lithuania, "disingenuously described as being near a hydroelectric dam." But Lithuania's grid is 0.5 percent hydroelectric and 78 percent nuclear. Perhaps the company's next huge farm will be "near" the Three Gorges Dam in China, built to generate over three times as much power as our own Grand Coulee Dam in Washington State. China will be happy to play along, while it quietly plugs another coal plant into its grid a few pylons down the line. All the while, of course, Google will maintain its low-energy headquarters in California, a state that often boasts of the wise regulatory policies -- centered, one is told, on efficiency and conservation -- that have made it such a frugal energy user. But in fact, sky-high prices have played the key role, curbing internal demand and propelling the flight from California of power plants, heavy industries, chip fabs, server farms, and much else (see "California's Potemkin Environmentalism," Spring 2008).

So the suggestion that we can lift ourselves out of the economic doldrums by spending lavishly on exceptionally expensive new sources of energy is absurd. "Green jobs" means Americans paying other Americans to chase carbon while the rest of the world builds new power plants and factories. And the environmental consequences of outsourcing jobs, industries, and carbon to developing countries are beyond dispute. They use energy far less efficiently than we do, and they remain almost completely oblivious to environmental impacts, just as we were in our own first century of industrialization. A massive transfer of carbon, industry, and jobs from us to them will raise carbon emissions, not lower them.

The grand theory for how the developed world can unilaterally save the planet seems to run like this. We buy time for the planet by rapidly slashing our own emissions. We do so by developing carbon-free alternatives even cheaper than carbon. The rest of the world will then quickly adopt these alternatives, leaving most of its trillion barrels of oil and trillion tons of coal safely buried, most of the rain forests standing, and most of the planet's carbon-rich soil undisturbed. From end to end, however, this vision strains credulity.

Perhaps it's the recognition of that inconvenient truth that has made the anti-carbon rhetoric increasingly apocalyptic. Coal trains have been analogized to boxcars headed for Auschwitz. There is talk of the extinction of all humanity. But then, we have heard such things before. It is indeed quite routine, in environmental discourse, to frame choices as involving potentially infinite costs on the green side of the ledger. If they really are infinite, no reasonable person can quibble about spending mere billions, or even trillions, on the dollar side, to dodge the apocalyptic bullet.

Thirty years ago, the case against nuclear power was framed as the "Zero-Infinity Dilemma." The risks of a meltdown might be vanishingly small, but if it happened, the costs would be infinitely large, so we should forget about uranium. Computer models demonstrated that meltdowns were highly unlikely and that the costs of a meltdown, should one occur, would be manageable -- but greens scoffed: huge computer models couldn't be trusted. So we ended up burning much more coal. The software shoe is on the other foot now; the machines that said nukes wouldn't melt now say that the ice caps will. Warming skeptics scoff in turn, and can quite plausibly argue that a planet is harder to model than a nuclear reactor. But that's a detail. From a rhetorical perspective, any claim that the infinite, the apocalypse, or the Almighty supports your side of the argument shuts down all further discussion.

To judge by actions rather than words, however, few people and almost no national governments actually believe in the infinite rewards of exorcising carbon from economic life. Kyoto has hurt the anti-carbon mission far more than carbon zealots seem to grasp. It has proved only that with carbon, governments will say and sign anything -- and then do less than nothing. The United States should steer well clear of such treaties because they are unenforceable, routinely ignored, and therefore worthless.

If we're truly worried about carbon, we must instead approach it as if the emissions originated in an annual eruption of Mount Krakatoa. Don't try to persuade the volcano to sign a treaty promising to stop. Focus instead on what might be done to protect and promote the planet's carbon sinks -- the systems that suck carbon back out of the air and bury it. Green plants currently pump 15 to 20 times as much carbon out of the atmosphere as humanity releases into it -- that's the pump that put all that carbon underground in the first place, millions of years ago. At present, almost all of that plant-captured carbon is released back into the atmosphere within a year or so by animal consumers. North America, however, is currently sinking almost two-thirds of its carbon emissions back into prairies and forests that were originally leveled in the 1800s but are now recovering. For the next 50 years or so, we should focus on promoting better land use and reforestation worldwide. Beyond that, weather and the oceans naturally sink about one-fifth of total fossil-fuel emissions. We should also investigate large-scale options for accelerating the process of ocean sequestration.

Carbon zealots despise carbon-sinking schemes because, they insist, nobody can be sure that the sunk carbon will stay sunk. Yet everything they propose hinges on the assumption that carbon already sunk by nature in what are now hugely valuable deposits of oil and coal can be kept sunk by treaty and imaginary cheaper-than-carbon alternatives. This, yet again, gets things backward. We certainly know how to improve agriculture to protect soil, and how to grow new trees, and how to maintain existing forests, and we can almost certainly learn how to mummify carbon and bury it back in the earth or the depths of the oceans, in ways that neither man nor nature will disturb. It's keeping nature's black gold sequestered from humanity that's impossible.

If we do need to do something serious about carbon, the sequestration of carbon after it's burned is the one approach that accepts the growth of carbon emissions as an inescapable fact of the twenty-first century. And it's the one approach that the rest of the world can embrace, too, here and now, because it begins with improving land use, which can lead directly and quickly to greater prosperity. If, on the other hand, we persist in building green bridges to nowhere, we will make things worse, not better. Good intentions aren't enough. Turned into ineffectual action, they can cost the earth and accelerate its ruin at the same time.

My thoughts: What a great idea! Let's bankrupt the country, send all our jobs to other countries, destroy our economy, and raise our cost of living (inflation), all at the same time! We'll call it "cap and trade"!

Flu, Day Two

Monday, April 27, 2009

Wheat, Soybean Deep Dives

Wheat has plunged too, but corn is holding its own at a lower price. I will be looking to buy wheat once prices consolidate with a stabilization of the swine flu epidemic. Wheat is now priced at a level that has shown solid support over the past few months. Thus, if the swine flu scare blows over quickly, it will be priced at a bargain.

Swine Flu Headlines Drive Markets

Euro Collapses Under Pressure from Flu Fears

Pandemic Could Lead to More Government Interventions

from Reuters:
The spread of a possible flu pandemic could see an increase in already heightened levels of government intervention in economies and financial markets as a result of the global financial crisis. In the short term, it might serve to give governments an easy justification to impose protectionist measures that could further stifle slumping trade flows.

Sense of Panic Grows, Swine Flu Spreads

Stocks have given up their gains now, and have turned negative, as the swine flu shows signs of spreading rapidly around the world. Stocks turned down as news broke that the World Health Organization was convening an emergency meeting. Subsequent news updates from officials have tended to fuel this fire.

Addictive Trading: Getting Control Back

from Dr. Brett--
My recent post on out-of-control trading brought many email inquiries and insightful comments on the blog. One of the common questions voiced was: How can you tell when a trader is passionate about trading vs. addicted to it?

The first step in dealing with any addictive pattern is identifying it--and identifying it as a problem. Here are a few questions that you might ask yourself:

* Have there been times when I told myself to stop trading, but still found myself placing trades any way?

* Do I find myself overtrading by putting on positions with too large size or by trading during periods when nothing is happening?

* Have my trading losses created problems for me in my relationship(s), or have they caused financial problems for me?

* Have people close to me told me that I need to stop trading?

* Is the pain from losing more extreme than the satisfaction from winning?

* Do I find my moods fluctuating with my P/L?

* Do I trade simply out of boredom sometimes?

* Do I find myself preoccupied with trading outside of market hours at the cost of other work and relationships?

Notice that, for many of these questions, you could substitute the word "drinking" or "gambling" for "trading". The dynamics of addictions are the same across the board. If you answered yes to three or more of these questions, I would suggest that trading has become a problem for you.

How does one deal with addictive trading? The first step is to identify it, but the second--and harder--step is to acknowledge that you need help for it. It's pride that tells us we can handle it on our own through will power, but addictions wouldn't occur in the first place if will power were sufficient to prevent consequences.

Telling yourself you can manage your own addiction is itself a form of denial.

That is why a key step in Alcoholics Anonymous is acknowledging that you are powerless against alcohol.

That is why AA substitutes mutual support for drinking and advocates abstinence as a goal.

Through books, self-help groups, and counseling, you learn to identify the thought and behavior patterns that drive your addictive behaviors. You also learn to identify cravings in advance and channel these in productive directions.

Most of all, you regain a measure of control over your life and end the negative consequences of the addiction.

If you find yourself unable to control your trading and you find the emotional, financial, and social consequences mounting, that's not a passion for trading. It's an addiction.

Do the right things:

1) Close your account.

2) Get help.

I do not provide private counseling myself, but will be happy to assist with a referral in your region. If these posts help just one person turn his or her life around, that will be one of the best returns on investment I've ever achieved.

Regaining Trading Consistency

from Dr. Brett--
A reader recently wrote to me the following:

I was a successful consistent trader who always hit singles and doubles ($1000-$3000 a day) for 48 months in a row without having a losing month (1999-2003).Then one day I struck out. I lost $38,000 in one stock and had my first losing month as a trader ever. Since then I have not had two consecutive winning months and in fact have only had a handful of profitable months since then. I am still looking for the road back to consistency. No matter how close I get I always find a way to screw it up even if it is on the last day of the month. Or I give back the month with just some silly unimportant trade that turns into a disaster. It is like I subconsciously look for these situations just so I can mess up.

This is not such an unusual scenario. One large loss can trigger a cascade of attempts to make back the money, further mistakes, and expanding losses. The key is breaking this cycle of losing money, attempting to make the money back with aggressive trades, and continuing to lose.

The first thing I'd have our trader look at is where he is placing stops and targets for his trades. Note that his successful period was 1999-2003. That was a period of much higher price volatility than we've seen since then. What constitutes "singles and doubles" in a high volatility environment is a home run trade in a slow, low-volatility market. It is entirely conceivable that our trader is placing targets too far from his entries, allowing small gains to reverse on him. Similarly, he may be letting trades get too far away from him simply because he is calibrated to a higher level of volatility.

A good way to test these hypotheses would be to study trades over the last several months. If losing trades are larger than winners on average, and if many losers start out as winners, that would suggest that our trader needs to adjust to the post 2003 environment.

To break the cycle mentioned above, the first step is to drastically reduce trading size. I would cut size to 1/4 the average at the most. The goal is to keep a little skin in the game, but take P/L (and the push to make back money) off the table temporarily. The initial objective is not to make money, but to regain a trading rhythm by getting back to singles and doubles.

The next step is to identify those singles and doubles. That means deconstructing the account statement and identifying which trades are making money and which aren't. I would break the data down into time of day, stock/index being traded, long/short, and size. I would also look to see if there are large outlier trades to the downside that are pulling down P/L, and if there are some trades that are making money consistently.

Once our trader has identified what's working, the idea is to keep position size fixed and *only* trade those setups that have been working. This is the foundation to build upon. These setups can be written down and mentally rehearsed ahead of the trading day to build consistency. The idea is to not increase size *and* not trade other patterns until consistency is achieved with smaller size and the most successful setups.

There is only one cure for trauma, and that is repeated experiences of control and safety. We want trading to be routine, not highly emotionally charged.

Finally, I would encourage our trader to take a look at how he is viewing his situation. Note above that he talks of the $38,000 loss and the silly trade that "turns into a disaster" as if these are things happening to him, not things that he is actively doing. A simple strategy would be to have the trader write down the four things he is responsible for prior to each trade:

* The Entry
* The Target(s)
* The Stop
* The Position Size

We can't control whether any individual trade will be a winner, but we can control how much we are willing to bet on each trade. Outsized losses don't happen to a trader; they are actively caused. It is harder to allow those things to occur if you're talking aloud those four trade parameters and have them written in front of you.

So there it is in a nutshell. My advice is to get small, get selective, and take responsibility for what can be controlled.

Do readers have additional advice? Let's see if we can help a reader. Thanks!


Painful Truths About Trading

from Dr. Brett-
The markets have been exceedingly volatile, and that has created pain as well as opportunity for traders. Here is a portion of an unusually perceptive email to me from a reader:

I have to trade conservatively since I am still in the beginning stages of the trading process…I trade a miniscule amount of shares. (I used to trade a large number in the beginning, which was not a smart thing to do, needless to say). But for now…I am trying to be as careful as possible...

When I enter a trade (upon breakout)…, I know exactly where to put my stop, so I know the exact amount I am willing to lose (less slippage). It usually…rallies a little bit, then pulls back, many times even below my entry point.

So far lately, I have taken the very tiny profit as it rallies a little after the breakout and then I quickly get out with a market order (...just because I have been burnt so much in the past - so I am being neurotically cautious to my detriment perhaps, since I could have so much more by staying in the trade). But then often the stock will rally back up and up and up ...without me on board....

So, then I get in again at the next breakout point and I am nickel and diming myself to wealth (to achieve wealth this way could take the next thousand years)....

Would it be actually smarter for me to just set my stop loss...but IF it does not retreat that far back, then, after it definitely cleared my entry point, just move my STOP LOSS to break-even (or arrange trailing stops) and go to find another trading opportunity?

There is so much pain involved in trading....

The reader is well aware that these trading patterns will not bring success. The question is how to address them. Here are a few considerations from both a trading psychology perspective and a pure trading one:

1) End the Pain - If you were experiencing significant spinal pain every time you walked, I would tell you to stop walking and call for help. Pain is a warning signal, and that includes emotional pain. A key to our trader's post is that he used to trade larger, but no longer because, "I have been burnt so much in the past." It is the retriggering of those losses that is contributing to his sense that "there is so much pain involved in trading." This is the dynamic of traumatic stress: events in the present flash us back to the painful events of the past, and we relive many of those emotions. While we may not be able to resolve traumatic stresses immediately, we certainly can stop restimulating them. Above all else, do no harm. Stop trading. Totally. Learn some behavioral methods of controlling anxiety and frustration and practice these daily (meditation is a great skill in this regard; combining biofeedback with deep breathing and guided imagery can also be effective). Once you master these methods, make yourself relive your prior trading losses *while you perform the meditation or relaxation exercises*. Keep repeating that until you get to the point where you can vividly visualize and reexperience your past trading losses without getting physiologically worked up. This is far and away the most effective approach to reprogramming traumatic memories. A therapist trained in behavioral methods (exposure work) can assist you with this work; it's not necessary that the person be a "trading coach" or know anything about trading.

2) Re-create Safety - Once you've made significant strides in reprogramming your emotional experience, go into simulation mode and rehearse proper trading strategies (see below) while keeping yourself calm. Only when you can implement your strategies *consistently* and with a calm focus should you consider going live with small positions. Then make yourself achieve consistency and calm with small positions before you gradually raise your size. The only way to overcome trauma is to experience repeated safety. The worst thing you can do is get frustrated and try to make your money back all at once, risking further emotional injury.

3) Research, Research, Research - If you're trading breakout patterns, study every breakout and false breakout you can find to become sensitive to the differences between the two. Look at volume on breakout moves; study normal retracements of valid breakouts vs. the more significant and rapid retracements of false breakouts. Examine behavior of indicators such as NYSE TICK on breakout moves. Your trading approach should reflect your research. Study the "tells" that occur prior to the big volume moves: selling (negative TICK) that cannot move the market to relative lows or buying (positive TICK) that fails to push the market meaningfully higher. Work on entering the long side on those TICK pullbacks; the short side on the TICK bounces. That little execution edge adds up over time. It also provides a natural stop point for short-term traders if the market initially goes your way and then reverses.

4) Practice Hitting Targets - What's missing from our trader's email? Profit targets! We hear a lot about stop loss and pain, not much about profit targets. In the absence of such targets, it's easy to get caught up in tick-by-tick action and take a quick, small profit, reducing reward as well as risk. It is important to have explicit profit targets. These may be pivot points, support/resistance levels, etc. Moreover, these targets should enable you to enjoy as much reward from trades as risk. Some of my own targets are indicator based: if I'm short, for example, I will cover at least some of my position if we get very negative TICK readings on enhanced volume, regardless where that price level may be. Once you establish your targets, practice in simulation mode letting trades run until they either hit the target or are stopped out. While the trade is running, you practice keeping yourself chilled with those relaxation exercises. You can't develop confidence in a trade if you never let the trade run. Simulation is a safe way to build experience and confidence.

I am often asked why I don't accept advertising on my blog, and why I don't participate any more in the popular trading conference events. One important reason is that I want the freedom to speak my mind, with as much honesty and integrity as I can muster. Our reader's email is not unusual in my experience. Writers blithely quote statistics that 80% or more of traders lose money, but rarely do we stop to consider that trading is creating pain for 80% or more of its participants.

Trading can be an incredibly destructive activity. You can pour money and dreams into trading without a demonstrable edge, go against professionals who have the best in research and execution, and you can lose everything.

Lose a house? Lose all your money? Lose your marriage? I've seen it all with traders. For every fortune made, I've seen many, many dreams dashed.

No one in the trading magazines, books, or seminars talks about that. One time I did mention it in a seminar and was told by the conference organizer to not talk on that topic further. I have not appeared at that conference since, by their wishes as well as mine.

The trading industry exists to get people to trade. Brokerages offer products that will get people to trade more. Software firms build in features that make it easier to place orders. Coaches and vendors offer promises of trading for a living and winning in markets.

But no one talks of the pain. No one wants to read the dozens and dozens of emails I receive every week from traders who are hurting.

So I choose to speak my mind without fear of commercial repercussions: If you're going to trade, do it the right way. Don't traumatize yourself. Observe and research before you trade; practice trading small and in simulation mode before you put your capital at risk. Don't abandon your day job until you have a track record of consistent profits across various market conditions. Trade less, not more: emphasize the high probability trades and keep your capital safe in the interim. Forget about riches and don't put yourself in a position where you need to trade large and often to make a living; work on covering costs consistently and managing risk. If you don't see objective evidence of an improving learning curve after a year or two of consistent effort, consider the possibility that your talents lie elsewhere.

Trading may or may not produce gain, but it should not be a continual source of pain. No one has ever traumatized themselves to success.


When Trading Gets Out of Control

Addictive Trading

How to Lose Right; The Psychology of Losing

from Dr. Brett--
A large body of research conducted by James Pennebaker of the University of Texas, Austin finds that the expression of emotion has long-term mental and physical health benefits. His book Opening Up is an excellent, readable summary of his investigations, with numerous practical applications.

One particularly interesting finding is that the venting of emotion alone does not help people deal with traumas and other difficult experience. Rather, it is placing experience into words--either through speech or writing--that helps us achieve a perspective that enables us to move on from difficult circumstances.

Study after study finds that, when people cannot give proper voice to their troubles, they experience significant health problems and increased medical utilization down the line. Perhaps this is why psychotherapy, online social tools, and religion confession are so popular in our culture: they are ways for us to process our daily experience--not just to unburden ourselves, but to find new views of our situations.

The relevance to trading is clear: It may not be losing that damages traders, but unacknowledged losing.

I recall one trader I met with who went through a nasty downturn in his P/L. He felt guilty about his losses and felt that he could not tell his wife, who was going through her own problems at the time. The more he hid the problems from her (and from friends), the more he felt stressed and upset--and the more his emotional state interfered with his trading. Only once we had a couples session and laid everything out was he able to clear the air emotionally and get back to trading basics. The losses were manageable in their size, but hiding them took too much of a toll.

Similarly, a trader who ignores a stop and turns a short-term trade into a longer-term hold is attempting to squelch the experience of loss. Instead, internal tension builds and helps the trader make further bad decisions, such as doubling down on the losing position.

Contrast that with the situation I described in my most recent entry on the Trader Performance page, where I look at the epistemological unit of a trader's thought. When a trade idea is based upon an anticipated market movement, not a single entry/exit, it frees the trader to anticipate a loss in advance and flexibly reverse a position. Psychologically, this means that a loss is processed before it even occurs. It is used as information that can help the trader capitalize upon the anticipated market move.

Increasingly, my trade ideas take the form of "what-if" decision trees that include the possibilities of initial, small positions moving my way and moving against me. The decision trees address adding to positions and scaling out of them, and they enable me to be wrong with the initial small position and still benefit from the larger idea.

By requiring yourself to map out these decision trees, you can process trading experience proactively and constructively. A losing trade is placed into a larger context in which it has potential value.

A trading journal at the end of the day then serves the purpose of reviewing performance, highlighting what you did right and wrong, and setting goals for the next day. Such a journal, too, has its psychological benefits. Pennebaker has found that the same benefits achieved by talking about one's feelings can be achieved by writing for 30 minutes in a journal.

I am increasingly convinced that how traders process experiences of loss--including extended periods of drawdown--separates those who come back strong and those who become bogged down and even traumatized.

* * *

PS - I'm now forwarding links to worthwhile readings across the Web via Twitter. If you do not have the Twitter comments automatically sent to your reader, you can check out the daily reading links and indicator summaries on my Twitter page. The most recent five Twitters appear on the TraderFeed home page under the column "Twitter Trader".


Some Painful Truths About Trading

Regaining Your Trading Consistency

Inside the Trader's Brain

Stocks Bounce at Open

Sunday, April 26, 2009

Down Futures Panicked!

Swine flu is really panicking the financial markets tonight.

Plunging Global FInancial Markets Panicked Over Swine Flu

Just about everything is plunging tonight over fears of a potential swine flu pandemic. Only the US Dollar and gold are higher. Commodities have continued to plunge minute by minute. Soybeans is down more than 45 cents at this writing, having eliminated the past 15 trading days of gains. Even currencies are in turmoil!

from Arlan Suderman's (Farm Futures) Twitters:
Swine flu fears have triggered another round of risk aversion in the world financial markets, spreading into the commodities.

Grains Get Clobbered in Evening Trading

Grains have been clobbered in overnight trading. Soybeans are down nearly half the limit!

California Now Sees Ethanol As Bad Idea

from Investor's Business Daily:

Energy Policy: California regulators are ready to conclude that corn ethanol cannot help the state fight global warming. It seems they've discovered putting food in our cars would destroy the earth in order to save it.

California regulators have apparently discovered it ain't easy being green. The California Air Resources Board began two days of hearings in Sacramento on Thursday on a proposed Low Carbon Fuel Standard which considers the carbon intensity of fuels during a given fuel's entire life cycle.

The California Environmental Protection Agency apparently has concluded that corn ethanol would not help the state implement Executive Order S-1-07. The order, signed by Gov. Arnold Schwarzenegger on Jan. 18, 2007, mandated a 10% reduction in the carbon intensity of the state's fuels by 2020. Fuels deemed to have low carbon intensity earn credits toward that goal.

With 20-20 hindsight, the California EPA, by dropping ethanol for now as a cure-all for climate change, is doing the right thing for the wrong reason. "Ethanol is a good fuel, but how it is produced is problematic," Dimitri Stanich, public information officer for the California EPA, said in an interview with World Net Daily. "The corn ethanol industry has to figure out another way to process corn into ethanol that is not so corn-intensive."

California could build more nuclear power plants, but never mind. Ethanol is in fact not a good fuel. According to the Hoover Institution's Henry Miller and Prof. Colin Carter of the University of California at Davis, "ethanol yields about 30% less energy per gallon of gasoline, so miles per gallon in internal combustion engines drop significantly."

It generates less than two units of energy for every unit of energy used to produce it. It takes about 1,700 gallons of water to produce one gallon of ethanol. Each acre of corn requires about 130 pounds of nitrogen and 55 pounds of phosphorous. Increased acreage means increased agricultural runoff, which is creating aquatic "dead zones" in our rivers, bays and coastal areas.

The California EPA now opposes corn ethanol in part because of the environmental damage it says growing the corn does. "Converting land that is now a 'carbon sink' to farmland producing ethanol," says Stanich, "also defeats the purpose of the regulations, because land now absorbing carbon dioxide would be cleared to produce corn."

Clearing land for biofuels is indeed a worldwide problem. A report by the Paris-based International Council for Science says that the production of biofuels has aggravated, rather than ameliorated, global warming. It releases nitrous oxide as well as CO2, which is said to trap heat at a rate 300 times more than an equivalent amount of CO2.

Increased mandated use of the corn-based fuel additive, according to the Congressional Budget Office, will raise the cost of food programs for the needy by $900 million for the current budget year ending Sept. 30. Ethanol and its subsidies amount to a hidden and nefarious tax on food.

"Producing ethanol for use in motor fuels increases the demand for corn, which ultimately raises the prices that consumers pay for a wide variety of foods at the grocery store, ranging from corn-syrup sweeteners in soft drinks to meat, dairy and poultry products," says the CBO. Higher use of ethanol accounted for up to 15% of the rise in food prices between April 2007 and April 2008.

The California EPA's conclusion does not change the mandated reduction in carbon emissions in the state. It does not slow down the headlong rush into an economic abyss by restraining economic growth in the name of achieving phantom climate gains.

But it should remind us that we have other, better means of reducing emissions, such as increased use of nuclear power, that do not raise food prices or abuse the earth while reducing emissions and providing electricity for economic growth, job creation and those electric clown cars the greenies want to cram us into.

Free Markets Work Because...

from Tim Hartford at

The market system does not work because of the incredibly smart people in charge. (The Soviets had some pretty smart people.) The market system works because nobody is in charge.